25 May 2018

When the cause of a social problem cannot - yet - clearly be identified then targeting the outcome we wish to achieve, and rewarding people for achieving it, could be the way to go. This is the Social Policy Bond approach. Many social and environmental problems fall into that category, including climate change, crime, poor health and war. We need long-term, diverse, adaptive approaches to the solutions of these problems - unfortunately these are exactly the sort of approaches that government is ill-equipped to discover.

The same limitations apply in microcosm in some areas of medicine; those such as cardio-vascular disease (CVD), for instance, where the relationship between high LDL and CVD appears to be too complex to form a basis for sound policy. Unfortunately, once a hypothesis is widely accepted, it becomes difficult to dislodge. Dr Malcolm Kendrick writes:

If your hypothesis is that a raised LDL causes CVD, then finding
someone with extremely high LDL, and no CVD, refutes your hypothesis. Unfortunately, but predictably, the authors of the paper have not
questioned the LDL approach. Instead, they fully accept that LDL does
cause CVD. So, this man must represent ‘a paradox’. They have
phrased it thus:

Further efforts are underway to interrogate why our patient has escaped the damaging consequences of familial hypercholesterolemia[FM] and could inform future efforts in drug discovery and therapy development.’

To rephrase their statement. We know that high LDL causes CVD. This man has extremely high LDL, with no CVD, so something must be protecting him. I have an alternative, and much simpler explanation: LDL does not cause CVD.
My explanation has the advantage that it fits the facts of this case
perfectly, with no need to start looking for any alternative
explanation. Very high LDL and no cardiovascular disease – at all!, Dr Malcolm Kendrick, 12 May

Dr Kendrick goes on to to cite the longest and one of the world's largest studies of people diagnosed with
familial hypercholesterolaemia (FH). Contrary to current popular thinking it shows that 'people
with FH have a lower than expected overall mortality rate – in
comparison to the ‘normal’ population. Or, to put this another way. If
you have FH, you live longer than the average person.'

This to me means that government policymakers should be more humble: when it comes to complex problems outside their expertise, they should admit to themselves that they don't know the best solutions. That doesn't mean they should do nothing: government can, and should, identify our social problems and raise the revenue to help solve them. It can actually do those quite well. But when it comes to solving our complex problems, it should consider issuing Social Policy Bonds, which do not presuppose how our problems shall be solved, nor who is best placed to solve them.

For more about Social Policy Bonds see here. For application of the Social Policy Bond principle to health, see here.

15 May 2018

In our complex, interlinked societies, it's increasingly difficult to identify cause and effect. This matters when making policy, because policy is supposed to have a beneficial effect. Linkages are sometimes easy to identify: that between, say, water quality and infectious disease rates, for instance. Others are much more difficult and, with our scientific knowledge rapidly growing, often impossible: So, facing problems such as crime or war or nuclear proliferation, where there are huge numbers of contributing variables, and our knowledge of relationships is both imperfect and expanding, should government do nothing, waiting for certainty?

What governments actually do is create bureaucracies, or shovel funds into bodies that might once have been successful (when society was simpler) but have become useless or, worse, obstacles in the way of achieving our goals.

A much better approach, in my view, is to target long-term outcomes, and let investors decide, continuously, what are the best approaches to solving our problems. Especially for longer-term goals, the optimal mix of approaches will vary with time in ways that nobody, including governments, can foresee. We need to reward people for coming up with new, efficient, solutions to our problems, many of which are so complex that only diverse, adaptive approaches will work. These are precisely the sorts of solutions that governments cannot identify. That, in essence is the Social Policy Bond approach.

Alternatively, we could opt for an easy life:

Peter Navarro, the head of the White House National Trade Council, told
an interviewer, “My function, really, as an economist is to try to
provide the underlying analytics that confirm [President Trump's] intuition. ...” Trump vs. the 'Deep State', Evan Osnos, 'New Yorker', dated 21 May

12 May 2018

If you've bought a new vehicle recently, you may have noticed some "safety features" that strike many as Nanny State over-reach. You
can't change radio stations, for example, if the vehicle is in reverse. ... The narrowness of this obsession with safety comes into focus if we ask: how
can a society so obsessed with safety have spawned an opioid addiction
crisis that kills tens of thousands of people and ruins the lives of
millions of Americans?
How Safe Are We? Our Blindness to Systemic Dangers, Charles Hugh Smith, 10 May

An excellent question. The safety bureaucracy has goals that differ markedly from those of the health care sector, and both have goals that have little to do with maximising the well-being of citizens per dollar spent. And that should be the guiding criterion for both health and safety: from the policy point of view, they shouldn't be distinct.

Policy decisions about health policy, broadly interpreted to include safety, are heavily influenced by the public profile of a disease or its victims, rather than on what would best meet the needs of society. It’s also a question of diet, exercise, transport, and culture. Recent research shows, for instance, the beneficial effects on health of green spaces in our cities (see here (pdf) for instance). The way government is structured, with its discrete bureaucracies and funding bodies, makes it unlikely that such benefits will influence funding decisions.

We cannot expect a government nor any single organisation to identify the huge numbers of variables, with all their time lags and interactions, that influence the nation’s health - and to do so dynamically, taking into account our rapidly expanding scientific knowledge. We can, though, devise a system that rewards people who explore and implement the most cost-effective health solutions, even when circumstances and knowledge are changing continuously. I have tried to show how this can be done with my essay on Health Bonds, which would aim to distribute scarce government funds to where they would do most good, as measured by such indicators as Disability Adjusted Life Years. Under a Health Bond regime, investors in the bonds would have continuous incentives to maximise their returns on the bonds at all times: their objective, assuming we have carefully defined our targeted health goal, will be exactly congruent with those of society. Bondholders might well decide that, for instance, we should implement measures to switch off the ability to flip radio stations while a car is going backwards - but only if they think that to be one of the most cost-effective ways of reaching society's health goal. Indeed, Health Bonds would ensure that every decision, every activity, that bondholders contemplate or implement will be entirely subordinated to that objective. A stark contrast with the current system, under which officials have goals entirely distinct from, and sometimes in conflict with, the broader interests of society.

03 May 2018

If you are serious about tackling climate change, the best approach, and the one I've advocated for years - decades - is to reward people for tackling climate change. Not to reduce greenhouse gas emissions, and certainly not to subsidise the production or use of biofuels. So, of course, subsidising biofuels, which means cutting down rainforests, is what the European Union, with its corrupt, psychotic subsidy regime, is paying people to do:

Half of all the palm oil imported by Europe is turned into biodiesel and blended into conventional fuel to power cars and trucks. This misguided attempt to "green" fuels is actually tripling carbon emissions, not reducing them. What's more, the practice is subsidised by the European Union. In other words, taxpayers are paying to destroy rainforests and accelerate climate change. The real palm oil problem: it’s not just in your food, 'New Scientist', 2 May

The loopholes in the way international carbon accounts are calculated mean that emissions from biomass are never counted. The New Scientist article quotes Tim Searchinger of Princeton University: 'You could cut down the Amazon, ship the trees to Europe to replace coal and that would count as a 100 per cent greenhouse gas reduction.'

There are plenty of suggestions in the UK media about how some of the people who voted for Brexit might have regrets. I don't.

02 May 2018

When operators are forced to adopt the negative implications of their decisions, poor decision-makers do not survive, asymmetries are eliminated, and the result is a system that is devoid of poor decision-makers. In other words, skin in the game does not just cause better decision-making because of disincentives; its evolutionary forces eliminate those fools or shysters who are the source of great systemic damage. Risk and business, David L Bahnsen, 'Nationial Review', 26 April

The pity is that operators in the public sector are rarely 'forced to adopt the negative implications of their decisions'. This is partly because effect is genuinely difficult to trace back to cause when looking at the consequences of, say, this or that health intervention or infrastructure investment decision: there are too many confounding variables and time lags. But it's also because nobody within our policymaking system has any incentive to evaluate. That's no basis for an efficient bureaucracy.

[G]overnment bureaucracies non-self-evaluate. At a minimum, agencies with evaluative responsibilities are not invited to evaluate - they are kept out of the loop, their opinions unsought. At a maximum, government agencies actively suppress their own internal evaluative units and are discouraged from evaluating the beliefs and policies of other agencies. Why States Believe Foolish Ideas: Non-Self-Evaluation By States And Societies (pdf), Stephen Van Evera, Massachusetts Institute of Technology Political Science Department and Security Studies Program, 2002

We need to be reminded that around 40 per cent of the rich world's income is spent by organisations that resist, almost to the death, the idea of examining their policy blunders and learning from them. I mean, of course, governments who, in Taleb's words, have no skin in the game.Van Evera says that even in the world wars of the 20th century, when policy mistakes could have grievous consequences: 'the belligerents made large errors without carefully assessing their options. Even rudimentary analysis often would have exposed these errors but was omitted.'

In my experience, it is often the smallest decisions in government that receive most scrutiny: whom to offer a three-month contract; which brand of computer printer to buy; that sort of thing. The larger decisions often escape detailed analysis. Sometimes this is unavoidable but what is inexcusable is that lessons from policymaking disasters are never learned. One grievous example: it's now estimated that the US intervention in in Iraq will cost about ten times more than the White House projected. This calculation was done by a non-governmental body and it's a safe bet that it will never be referred to when similar enterprises are considered in the future.

Social Policy Bonds would change this. They would give investors in the bonds incentives to look at which projects help achieve society's goals, and which are a waste of resources. They would do this on a continuous basis; that is, throughout the lifetime of the bond. Currently, the way governments tackle long-term goals is to build on existing ideas with, perhaps, some funding for research. Incremental improvements are possible, but there are few financial incentives to come up with innovative ideas that might undermine existing institutions. Social Policy Bonds, in contrast, would subordinate institutional survival, and all their activities, to the efficient achievement of transparent, meaningful outcomes. At every stage of every approach that will be needed to solve our most complex social problems, bondholders (and would-be bondholders) would have powerful incentives to explore, investigate and implement only the most promising projects and, crucially, to terminate those that are failing or inefficient. They will have so much 'skin in the game' that they would optimise returns on their investment to the benefit not only of themselves but of all members of society.

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Social Policy Bonds

See the Social Policy Bonds website for overviews and links to articles, papers, news and more about Social Policy Bonds. Click on the image in the panel below to download a 2400-word article published by the Institute of Economic Affairs, London.

Social Policy Bonds in 2400 words

Social Policy Bonds in the media

25 May 2018: a short article on Social Policy Bonds and their possible application in India, appears on Market Express (India). It is by Dr Ashok V Desai and titled Incentivizing welfare.

9 October 2015: An article by Greg Bearup on the genesis of the Social Policy Bond idea, and application of a version of it in Australia appears in the Weekend Australian Magazine. (The article can also be downloaded as a pdf from here.)

October 2013: Professor Robert Shiller of Yale University, is named as one of the three winners of the 2013 Nobel Prize in Economics. His Nobel Prize lecture (pdf) delivered on 8 December, mentions Social Policy Bonds. Professor Shiller has for many years encouraged my work on Social Policy Bonds, beginning in late 1996 when he sent me this letter.

3 May 2012: An audio talk by Nobel Prize winner Professor Robert Shiller at the London School of Economics, in which Social Policy Bonds are briefly mentioned, is available here.